The periodical problem

The increase in the number of periodical payment orders being awarded to personal injury claimants is presenting general insurers with new risk management challenges, more akin to those faced by life insurers. Clive Davidson finds that a consistent approach to managing these liabilities has yet to emerge

Clocks

The periodical problem

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The periodical problem

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Since 2005, UK courts have had the power to award a portion of the settlement of large personal injury claims as a series of index-linked annual payments throughout the lifetime of the claimant, rather than the traditional, single lump sum.

Although take-up was slow initially, the number of periodical payment orders (PPOs) has increased during the past four years. As these liabilities become more material on insurers’ balance sheets, they present a number of challenges for companies.

For a start, the liabilities are of far longer duration than most general insurers are accustomed to dealing with. The index with which they are linked is not straightforward to hedge. And there are legislative and other uncertainties that insurers must consider. All of which implies the need to carefully measure, monitor and manage their risks.

“PPOs represent a change to an existing portfolio of liabilities by creating additional longer term uncertainties,” says Gerald Dodds, chief risk officer for UK general insurance at Zurich.

A survey conducted in 2011 by the PPO working party of the Institute and Faculty of Actuaries, the chartered professional body for actuaries in the UK, revealed that PPO claimants are relatively young, being on average around 34 years old, and with a typical life expectancy of around 41 years.

A large majority of PPOs are awarded for serious brain injuries, followed by spinal injuries, arising mostly from motor- and work-related accidents.

The number of claims settled each year as PPOs is about 100, but that number has been growing steadily since 2008. The proportion of motor claims of more than £1 million that settled as PPOs rose from 18% to 35% between 2008 and 2010.

Furthermore, the current number of PPOs on insurers’ books might just be the tip of the iceberg, warns global consultancy Towers Watson. “PPOs take six years on average to settle and can take up to 15 years,” says Sarah MacDonnell, actuarial consultant at Towers Watson and member of the PPO working party of the Institute and Faculty of Actuaries.

“So there are injuries that have already happened for which insurers are liable, but it is difficult to say whether they will settle as PPOs or not. Also, there might be changes in the environment that will increase the propensity for PPOs. They could become more popular and spread into other injuries,” MacDonnell adds.

Because PPOs represent a potentially growing segment of liabilities, and because of their differences from traditional general insurance liabilities, companies need to examine their risks and explore strategies to manage their commitments.

David Miller, executive director, client services UK, for Chartis Europe, says: “PPOs have to be administered for the life of the claimant – an uncertain period. The mortality risk is passed to the insurer and there is immature evidence on impaired life expectancies in the UK.”

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